Gifting Money to Children

To give this blog a more complete title we should call it, Gifting money to children – Don’t do this. We will look at a recent case on this. The beauty of the case is that it gives a good idea of the basics of CAT. Plus, a lesson in what not to do. CAT stands for Capital Acquisitions Tax and applies to gifts and inheritances.

So, the person acquiring the gift or inheritance pays the tax. The rate is 33% but you can get set amounts tax-free. We all love those words tax-free. They have a beautiful tone to them. Let’s look at

• The basics
• Background of the case
• Taxpayer evidence
• Revenue evidence
• Decision
• Summary

The Basics

The basics of CAT are three things.

1. You pay tax at 33% on anything above the allowable threshold.
2. Thresholds depend on the relationship between the giver and the receiver. For example, the highest threshold amount is from a parent to a child and that stands at €335,000. This is the Group A threshold. The Group B threshold is €32,500 and Group C is €16,250.
3. There is a lifetime limit. All gifts and inheritances you get from the 5th of December 1991 in the same threshold add together.

You’ll get a good idea of how this works when we go through some basic numbers below. So, hang in there.

Most of you will be aware of the small gift exemption. This is where you can make an annual gift of up to €3,000. The beauty of this is that it doesn’t eat into the threshold and, as such, is tax-free. It is an excellent tax planning tool when passing on wealth.

Background of the case

We’ll call the taxpayer Fred. Fred versus Revenue. Conor O’Higgins is the Appeal Commissioner. And let’s call Fred’s dad Charles, who is a solicitor. Charles and his wife gave Fred lump sums over 5 years as follows:

• €170,000 in 2017
• €19,245 in 2018
• €142,000 in 2020
• €165,000 in 2021
• €49,500 in 2021

The last gift of €49,500 from Fred’s parents to him was to pay the CAT liability on the gift of €165,000. Revenue raised a CAT assessment on Fred for €65,835 in March 2022.

Charles represented Fred at the Appeal Commissioners hearing. They disputed the CAT liability of €65,835. They did this on the basis that the €170,000 gift in 2017 and €19,245 in 2018 were exempt from tax.

But Revenue didn’t agree. Their view is that 2017 and 2018 gifts were not exempt and fell into the lifetime limit threshold.

Tax calculation

Fred has no tax liability on the €170,000 he gets in 2017 nor on the €19,245 he gets in 2018. The combined values are less than the parent-child threshold of €335,000. It’s the 2021 gift of €165,000 that brings him into the Revenue net. 

2017 Gift	€170,000
2018 Gift	€19,245
2020 Gift	€142,000
Total	€331,245
Small gift exemptions [approx]	€11,245
Threshold used up	€320,000

When Fred gets the gift of €165,000 in 2021, he only has €15,000 remaining of his Group A threshold.

Gift in 2021	€165,000
Threshold balance [€335-€320]	€15,000
Taxable balance	€150,000
Tax payable 33%	€49,500
Gift from parent to pay the tax	€49,500
Tax payable on tax gift 33%	€16,335
Total tax payable	€65,835

I would add that in my view there should have been a deduction of €6.000 from the €165,000 being two small gift exemptions.

Taxpayer evidence

Charles gave evidence to confirm that the gift of €170,000 in 2017 was an accumulation of gifts from him and his wife. Every gift, the first of which was in 1992, was equal to the maximum small gift exemption allowed for each year. These were up until 2017. Furthermore, included in the €170,000 were annual gifts from two great aunts up to their deaths in 2003 and 2010.

Charles indicated that the gift of €19,245 came from different unidentified sources. The value was a sum of gifts given to Charles for Fred

“to mark notable events such as his communion, confirmation, birthdays, and sporting achievements”

The estimated value of these gifts came to €12,000 to €13,000 and they lodged them in a Post Office Account. They cashed in the Post Office savings certificates in 2018 and lodged the cash to Fred’s account.

Earmarked Money

Charles stated that €105,000 of the 2017 gift of €170,000 were annual gifts he and his wife made to Fred since 1992. Each annual payment made by them was the maximum allowable gift they could make. £500 in 1992 rising to €3,000 in 2017. The payments were not made by transferring the money to a separate account in Fred’s name. Charles stated that he and his wife “earmarked” money in their joint account for Fred’s benefit.

“All I simply did was I went back to 1992 and I could see that I was able to give him 500. My wife was able to give him 500. At a later stage, I think it went up to 750 or 1,000. It was very easy to do a pen and paper exercise. So that is how I arrived at the €105,000, over the course of his lifetime from 1992 to 2017″

Funds from Aunts

Charles also confirmed that the gift in 2017 was also made up of small gifts made to Fred by his two great aunts. These gifts we made from 1992 until their deaths in 2003 and 2010. Charles stated that the total amount given over the relevant years was €42,000.

“Every year in January, I would tell them what they were entitled to give, and they gave it to me in cash.”

The appeal commissioner understood that Charles and his wife earmarked this money too.

Counsel for Revenue asked Charles if he had any documentation recording this money. Charles stated that legislation didn’t require Fred to keep documentation to get the exemption.

Revenue Evidence

Revenue cited a Tax case Menolly Homes v Revenue Commissioners. This case confirms that the burden of proof in the appeal process is on the taxpayer. That means that it’s up to the taxpayer to prove that the tax is not payable.

Counsel for Revenue stated that there was no documentation to back up the oral evidence. She confirmed that to get a relief or exemption under the Taxes Acts the taxpayer needs proof. This is documentary evidence to support the claim to the relief or the exemption.

Her view was that the “earmarking” of funds was a look back exercise to see how much they could give without a tax charge.

Decision

For the Appeal Commissioner, the decision boiled down to two questions.

The first is whether the €170,000 given by Charles and his wife to Fred in 2017 is either:

• A single gift or
• A series of small gifts given annually by the taxpayer’s parents and great aunts

The second is whether the €19,245 lodged to Fred’s account in 2018 is a series of small gifts from friends and well-wishers.

If the answer, in both cases, is that they are a series of small gifts then the CAT arising in 2021 should be nil. It would be nil on the basis that the first two gifts are exempt. The next two gifts are €142,000 and €165,000. Combined they are less than the €335,000 Group A parent-child threshold.

Mr O’Higgins noted that the only evidence submitted as background to the 2017 and 2018 gifts was from Charles. This was oral evidence only and there was nothing to back up his claim. On that basis, Charles expected the CAT liability to reduce to nil. Mr O’Higgins stated.

“This legal submission was misconceived”

Findings

As a result, the Appeal Commissioner found that

1. The 2017 payment was a gift made by Fred’s parents to him in that year and
2. The lodgement of €19,245 came from a gift made to Fred by his parents.

He went on to confirm that a look back exercise of seeing how much Fred’s parents could give him is at odds with the law. The legislation states that a gift must be

“taken by a donee [Fred] from a disponer [parents] in any relevant period [i.e. in a period of 12 months]”

The absence of any supporting documentary evidence was fatal to Fred’s case. He went on to state that

“It would have been an obvious and straightforward course to establish a bank account in the Appellant’s name. And transfer funds gifted to the Appellant to that place.”

Summary 

So, no joy for Fred and Charles here. The CAT liability stands, and Fred will have to pay up. Setting up a bank account in Fred’s name when he was born in 1992 would have saved the day. Earmarking and intermixing funds in your own account doesn’t work. When gifting money to children, or others, the money has to go from your account to their account. Simple as.

When I looked at this case, and saw that it was short, and after reading the first page, there was only one outcome. To my huge surprise, this case is going further to the High Court. It would be a massive shock if there was a different result.

Need help passing on money to your kids? If so, start here